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Study Sees a Limit to Gas Substitution for Coal

The estimates of the amount of natural gas yet to be unearthed through hydraulic fracturing or "fracgas" vary widely, but there is a "determined limit" on coal-to-gas substitution that is "far short of driving coal out of the power market," according to a new study by members of the Yale Graduates Energy Study Group.

The study, "Replacement of Coal by Fracgas in the Production of Electric Power," was conducted by group members Robert M Ames of Tyson Foods Inc., Anthony Corridore of Lafarge Corp., Edward Hirs of the University of Houston's Department of Economics, and Paul W. MacAvoy of the Yale School of Management.

"New well drilling technologies, when utilized to fracture common shale formations promise to provide access to very large volumes of gas," the researchers said. "Indeed, the trade press and news media have generally taken the position that 'fracgas' over the next decade can add up to 800 Tcf of reserves, four times the current level of reserves, almost equally spaced over the four quadrants of the country. But estimates of reserves are notably judgmental and with respect to new finds can be over optimistic."

But the "key issue," they said, "is not the size of the far future reserve base, but rather if fracgas production can replace coal in electricity generation in the next few years as limits on coal sulfur and carbon oxide emissions are phased into coal plant operations. Fracgas per kilowatt hour of produced electricity has an emissions rate one-quarter that of coal. Then is it going to be used in gas engines to replace shutdown coal boilers to the extent required to sustain growing electricity supply?"

According to the study, the answer isn't in "detailed and controversial" reserves estimates. The researchers contend that there are two sources of data that are relevant:

The researchers used a range of values to estimate the cross elasticity of coal demand with respect to gas price, that is the change in coal in power production with respect to the change in gas price. In addition to their estimates, they also reviewed other recent data and concluded that it would be a long time before shale gas usurped coal in the power market.

"No source in energy policy formation appears to have gone back behind the expansive statements on fracgas to determine whether it is the 'discovery of the present century,'" said the four researchers. "If they had done so, then they would have started with survey work that specified when and to what extent the new fracgas supplies would replace coal as the preferred fuel in power plants.

"The new GE turbines would be shown as having been ordered for gas plants to be built in place of the coal plants that were without scrubbers or at the end of a 40-year working life. Corporate plans would be documented for transfer of gas peaking plants to baseload. And industrywide plans for additional generating capacity would show the expanded future use of fracgas to meet new demand for electricity."

Some data and analysis, they contend, have attempted to estimate the percentage changes in coal used in power production associated with percentage changes in prices of gas. However, the various estimates are all "based on old data," said the researchers. Gas would appear to be superior to coal in many ways, but it is a more expensive source of heat at current prices. Coal also doesn't require storage and doesn't require pipeline transport.

Using historic energy economics, gas production would follow reserves in a ratio of 1:10. A fourfold increase in reserves, to 800 Tcf from 200 Tcf, would be followed by a similar increase in gas production to 80 Tcf from 20 Tcf. However, this is unlikely to occur for several reasons, said the team. Gas pipelines would have to be expanded by one-third to move an additional 10 Tcf of gas to power plants.

There's also no economic evidence to support fuel switching when gas prices drop relative to coal, they contend. Referring to a study conducted from 1973 to 2007 by the Energy Information Administration, World Bank and the University of Calgary, they said that cross-elasticity of coal-to-gas is 0.06, which means gas used in electricity increases 0.6% for every 10% decrease in gas prices relative to coal.

Based on the data, there's "no case to be made for gas taking over and driving coal out of the markets for fuel to generate electricity. The most that can take expected in the next five to 10 years -- the years that count for corporate investment and federal pollution abatement policy -- is that fracgas will supplant 20% of coal otherwise used in power plants. That is not totally consistent with the hyperbole fracgas is this country's most important new energy source of this century."

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